DGCA kills innovative, customer friendly pricing by Air Asia

Air Asia,the newest aviation kid on the block, got a taste of the heavy hand of Indian regulators even before it starts service on June 12. The Director General of Civil Aviation directed them not to implement their innovative initiative to charge only those passengers with check-in luggage for the service. The normal practice is to build-in the average cost of a 15 kg free luggage allowance whether one needs it or not.

Why DGCA was compelled to do so remains in the secret annals of the regulator which, being a government agency, hoards information on why decisions are made. There could be three possible reasons why this happened.

First, this unbundling of the checked in luggage charge was a departure from the norm. Babus hate such departures. The absence of the all-important “precedent” complicates life for them. A possible stint at Tihar, looms large in their minds, if their decision is perceived as favouring the licensee. This particular decision predated the assurance from PM Modi that babus need not be scared of retribution, unless it is deserved.

The key to effective governance is innovation. This “can-do” approach is foreign to the average babu DNA, across the world. But it is only innovation, which can reduce transaction cost and improve efficiency- both sorely needed in India.

The international experience in economic regulation indicates that intrusive regulation retards innovation. Nor does it help consumer interest, because the supplier is left with no incentive to increase profits by optimizing costs and maximizing revenue. Secondly, the entrepreneurial energy, which is unleashed by competition in the market, gets blunted if market forces are unduly restrained.

The Indian aviation market has more choice than two decades ago. But competition is still stifled by the “cartel” of five scheduled operators: Air India, Jet, Indigo, Go and Spice jet. To be fair, since their injection into the market, they have led on price discovery. Air India has been unable to compete and is accumulating massive loss, despite the advantage of preferential allotment of prime travel slots and destinations.

Cartels, like babus, hate “disruptive innovation” since it shakes up a stable financial equilibrium they have adjusted to over time. Consumers on the other hand look for such innovations in pricing which adapt to their specific capacity to pay. Think Hindustan Lever’s shampoo sachets.

Air Asia did just that. It slashed its inaugural tickets to negligible amounts. But it proposes to charge if you want to check-in luggage. This is welcome news for those on short trips, who carry nothing more than a briefcase. But it is terrible news for those who travel with a “colonial style” “bistra bund”. Air Asia proposes to allocate cost only to those on whose behalf they are incurred.

Today the “bistra bund” lot free rides on the price paid by the “briefcase” lot. This is also bad news for passengers who consume their 15 kg free allowance but hang around, trying to pool their surplus luggage with other obliging passengers. Many obliged because their unused free luggage allowance was a sunk cost, till Air Asia came around.

Tariffs drive behavior. Airlines have already unbundled preferential seat allotment and food service with salutary effect on customer and staff behavior. Customers no longer jostle, pull rank or use influence to get the seat of their choice for free. Now its pay and get. Cabin staff, which previously used to throw free food and drinks at customers, like relief workers do at refugees, is now responsive to customer needs. Paisa bolta hai (money talks).

Possibly DGCA had concerns about Air-Asia duping customers into buying cheap tickets and then loading charges on them at the last minute, whilst checking in. This could have been dealt with by requiring the airline to (1) get a declaration signed from the customer that they are aware of the “no free luggage” clause and (2) ensured that in all advertisements of the cheap fares, the “no free luggage” clause is prominently displayed. After all airline customers have already got used to paying for their food and drinks on board and paying for specific seats. How is luggage so different?

A third concern, DGCA may have had, is of predatory pricing. This is what the existing “cartel” charged Air-Asia to be indulging in. At the very least the charge is odd. Predatory pricing is a strategy usually adopted by an existing dominant supplier, with huge sunk costs, to keep competition at bay. The fledgling Air Asia is hardly a likely candidate to invite the charge of predatory pricing.

Civil Aviation is a vital sector of the domestic economy. Viewed holistically, with railways, road and waterways; it is integral to an efficient multi-modal transportation system, each of which has a comparative advantage for a particular profile of passenger and cargo.

Unfortunately aviation continues to be viewed as a service for the rich. Aviation fuel is taxed punitively. The sector is ruled with a heavy hand by the DGCA-the government managed regulator. A report authored by Nathan Consulting in 2008 concludes that aviation needs to transition to more light handed and market oriented regulatory options, in the interests of enhanced competition and protection of customer interest.

The DGCA has erred in knocking down the very worthwhile innovation by Air Asia, which is perfectly in line with sound economics for the determination of fair and efficient user charges. At the very least, this reeks of an unsuitable, heavy handed, danda wielding style of regulation.

At its very worst, this action can be construed as undesirable collaboration with the “cartel” to “discipline” the kid in town- Air-Asia. In either case it has not brought glory to DGCA, which is more familiar with engineering safety concerns rather than the nuances of economic regulation.

One hopes, that the new chief babu in Civil Aviation and the new minister will show the way and reward rather than retard dynamic and innovative pricing.

DISCLAIMER : Views expressed above are the author's own.

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Author

Sanjeev S. Ahluwalia is currently Advisor, Observer Research Foundation, New Delhi; His speciality is economic governance, institutional development and political economy. He also hosts a blog: www.ahlu-india.com and is an Honorary Member, Advisory Board, The Energy Research Institute (TERI), New Delhi and Honorary Member, of the Governing Council of the Centre for Infrastructure Regulation and Competition (CIRC), New Delhi.
https://ahlu-india.com
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Sanjeev S. Ahluwalia is currently Advisor, Observer Research Foundation, New Delhi; His speciality is economic governance, institutional development and pol. . .